Central bank slightly raises Korea’s growth forecast

South Korea’s central bank on Thursday revised up the nation’s economic growth forecast to 2.6 percent from the previous January projection of 2.5 percent, citing improved exports and a turnaround in facility investment.

It is the first time that the Bank of Korea has raised the nation’s growth forecast in three years since April 2014, when it revised it up to 4 percent from 3.8 percent.

In an updated quarterly economic outlook report, the BOK said a recovery in the global economy drove up exports in the local information technology sector and the rising global demand is expected to prompt Korean conglomerates to increase facility investment further this year.

“We revised up the growth forecast mainly due to the 0.1 percentage point upward revision in the fourth-quarter GDP growth. I had noted earlier this year that consumer sentiment was very weak. But since the impeachment (of former President Park Geun-hye) and the fixture of the presidential election date, consumer sentiment has somewhat improved because uncertainties have been cleared up,” BOK Gov. Lee Ju-yeol said at a press conference.

Exports, which Asia’s fourth-largest economy heavily relies on, rose 13.7 percent in March from a year earlier, the largest gain since December 2014 and an increase for the fifth consecutive month, according to latest data by the Trade Ministry.

Facility investment will turn from a 2.3 percent contraction last year to a 6.3 percent growth this year, the BOK said.

However, Lee cautioned that the recovery of exports could be restricted by uncertainties over trade with China in the wake of Seoul-Beijing row over the deployment of a US anti-missile system in South Korea, and rising security tensions on the Korean Peninsula.

“North Korea-related geopolitical risks have recently raised volatility in the local markets but such risks have not been realized in numbers. It is hard to predict what kind of impact it will bring (on the Korean economy) for now,” Lee said.

He also dismissed the possibility of South Korea being named as a currency manipulator, citing US President Donald Trump’s recent comment in a media interview that the US will not label China as a currency manipulator.

The BOK also forecast that the consumer prices will rise 1.9 percent this year, 0.1 percentage point up from the previous projection.

For 2018, Korea’s gross domestic product growth is expected to rise to 2.9 percent and consumer prices, 1.9 percent, the BOK said.

Earlier in the day, the BOK kept its base rate at the all-time low of 1.25 percent for 10 consecutive months, after making a surprise cut by 0.25 percentage point in June to prop up the economy.

Lee ruled out a possibility for a rate cut in the BOK’s next moves, saying that “considering the rising trends of growth and inflation, the need for a rate cut has been diminished.”

Even if the US Federal Reserve raises its key rates further this year after a 0.25 percentage point hike to a range of 0.75-1 percent in March, upward pressure on market interest rates will not be large enough to prompt a foreign capital flight from the South Korean market, Lee said.

His comments was in response to worries that a reverse of interest rate gap between Korea and the US -- if Korea keeps the rate unchanged and the US raises rates -- might push foreign investors look for higher-yielding assets.

“The Fed’s rate hikes will be gradual and the demand for the local bond market is still strong. International capital flows are decided not only by the interest rate gap but also by conditions of the local economy, inflation moves and foreign exchange rate forecasts,” he said.

By Kim Yoon-mi (yoonmi@heraldcorp.com)